What Has Caused Sheng Siong Group Ltd’s Returns To Decline?

Sheng Siong Group Ltd (SGX: OV8) is a company that may be familiar for many in Singapore. That’s because the supermarket operator has 39 retail outlets scattered across the island as of 31 December 2015.

The company was listed on Singapore’s stock market in 2011 and since then, it has been involved with at least three property purchases.

The first purchase was made in 2013 and it consists of 18,500 square feet of retail space at the Junction 9 mixed-use development in Yishun. The property had cost the company S$54.9 million.

Then, in 2014 Sheng Siong purchased a property in Tampines for S$65 million.

Finally, just last week the company exercised its option to buy a property located in Upper Changi Road at a cost of S$53 million.

The real estate were purchased with the intent to use them for supermarket operations. The company can utilize these properties for the running of its bread-and-butter retail business and not worry about any lease agreements.

But with Sheng SIong spending over S$170 million on those three properties, which is a significant sum given the company’s average annual revenue of S$704 million from 2012 to 2015, the company has become increasingly asset heavy. Let’s analyze the company’s financial picture to see how its results have been affected.

My focus is on the return on equity (ROE) and return on capital (ROC) metrics.

The ROE tells us the amount of net income that is generated by a company as a percentage of its shareholders’ equity. The ROC meanwhile, measures a company’s profitability and the efficiency with which its total capital (equity and debt) is employed.

According to data from S&P Global Market Intelligence, Sheng Siong’s ROE has decreased from 28.4% in 2011 to 23.6% in 2015. What this means is that for every S$100 of equity the company had, it made a net profit ofS$28.40 in 2011 and just S$23.60 in 2015. It shows that Sheng Siong is using its shareholder’s equity less optimally than it used to in the past.

Moving on to the ROC, Sheng Siong again recorded a decline from 2011 to 2015. The company’s ROC had slipped from 19.2% to 17.1% in that period. In a similar manner to the lower ROE, this shows that Sheng Siong is using its capital less efficiently than before.

The decrease in Sheng Siong’s ROE and ROC can be partly attributed to its property purchases. This is because the cash that’s used to buy the properties can’t be used to fund expansions in other areas or returned to shareholders as dividends.

To sum up, while there can be good reasons for a company to purchase a property (such as securing premises), it comes at a cost. The company would move from being asset light to asset heavy, which results in a lower ROE and ROC.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Esjay does not own shares in any companies mentioned.